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Due Diligence for Investing in Real Estate

Due Diligence of the property

Real estate is one of the fastest growing sectors in India evidenced by a sharp increase in estate transactions involving buying, selling, leasing and financing of properties. In addition to transactions in urban areas, we have also witnessed large scale procurement of land from individuals in villages close to the urban, industrial and commercial centres. Similarly, there has also been an increase in leasing (both short and long term) of commercial office space.

The increase in real estate transaction values combined with the growing participation of the organized sector in estate has resulted in heightened awareness of the risks involved and, consequently, the need for ensuring that the risks are identified and minimized in such transactions. ‘Legal due diligence/ title search’ of real property (be it of vacant tracts of land or of constructed residential/ commercial/ industrial properties) is clearly the mode for achieving these objectives.

This exercise is probably the most important aspect of a transaction involving real estate immediately following a broad understanding of the commercials. This process has the potential of not only impacting the commercials but also determining the feasibility of the transaction itself. While the commercials often pay high importance to expedite the conclusion of a transaction, it is critical in the interests of the players to provide adequate time and attention to a detailed check of the property involved. It is important to realize issues such as title, permitted use, legality of construction, encumbrances and easements which have the ability to impact the very nature of the property and its suitability to the commercial needs of the transaction.

Need for conducting and scope of legal due diligence of real property:

It is conducted mainly to verify the ownership of title over the property and any encumbrances, so as to protect one against pre-existing claims over the property. Such claims could either effect the ability of the transferor to transfer the property or could attach themselves to the property even after it is transferred.

The primary objective of it is therefore to gather information. The extent and type of due diligence to be undertaken by the purchaser’s lawyer will depend on the following:

  • the risk profile and business objectives of the purchaser/ lessee;
  • the type of real asset involved;

iii.  nature of the realestate transaction (i.e., whether it is a purchase, long term/ short term lease, mortgage or financing of the real property);

  • the time frame for completion of the transaction; and
  • whether the purchaser is looking at obtaining third party financing either pre-transaction or post-transaction.

Steps involved in conducting such due diligence/ title search:

In order to conduct a title search/ title verification, the following aspects would require to be examined:

  • Legal capacity of the present owner of the property (whether the person is legally capable of entering into a binding contract for sale or lease of the property or for mortgaging the property);
  • Nature of current owner’s right over the property, and whether such right is transferable;
  • Source of right or title of the current owner;
  • Legality of the construction;
  • Encumbrances over the property; and
  • Whether the property is a part of any acquisition process.

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